Question 1

A high spot price relative to the strike price will result in a relatively high premium for a call option and a relatively high premium for a put option.

Accepted Answer

A) True 
 B)False

Question 2

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

Accepted Answer

A) True 
 B)False

Question 3

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?

Accepted Answer

A) 1.9 percent discount 
B) 1.9 percent premium 
C) 7.6 percent premium 
D) 7.6 percent discount

Question 4

Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.

Accepted Answer

A) True 
 B)False

Question 5

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

Accepted Answer

A) True 
 B)False

Question 6

If you have bought a right to buy foreign currency, you are:

Accepted Answer

A) a call writer. 
B) a call buyer. 
C) a put writer. 
D) a put buyer.

Question 7

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?​

Accepted Answer

A) $44,500. 
B) $45,000. 
C) $526 million. 
D) $47,500.

Question 8

If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options.

Accepted Answer

A) purchasing; selling 
B) purchasing; purchasing 
C) selling; selling 
D) selling; purchasing

Question 9

If a currency call option is in the money, then the present exchange rate exceeds the strike price.

Accepted Answer

A) True 
 B)False

Question 10

The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is:

Accepted Answer

A) 0 percent. 
B) 25 percent. 
C) 50 percent. 
D) 150 percent. 
E) none of the above

Question 11

The purchase of a currency put option would be appropriate for which of the following?​

Accepted Answer

A) Investors who expect to buy a foreign bond in one month. 
B) Corporations that expect to buy foreign currency to finance foreign subsidiaries. 
C) Corporations that expect to collect on a foreign account receivable in one month. 
D) all of the above

Question 12

American-style options can be exercised any time up to maturity.

Accepted Answer

A) True 
 B)False

Question 13

The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal Trade Commission.

Accepted Answer

A) True 
 B)False

Question 14

If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.

Accepted Answer

A) True 
 B)False

Question 15

The spot rate of the euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro?

Accepted Answer

A) $1.28 
B) $1.30 
C) $1.42 
D) $1.16

Question 16

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

Accepted Answer

A) True 
 B)False

Question 17

It is possible to have an opportunity loss when using futures to hedge.

Accepted Answer

A) True 
 B)False

Question 18

A currency call option grants the right to sell a specific currency at a designated price within a specific time period.

Accepted Answer

A) True 
 B)False

Question 19

Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts.

Accepted Answer

A) True 
 B)False

Question 20

When the current exchange rate is less than the strike price, a call option with that strike price will be in the money and a put option with that strike price will be out of the money.

Accepted Answer

A) True 
 B)False

Exam 5: Currency Derivatives

A high spot price relative to the strike price will result in a relatively high premium for a call option and a relatively high premium for a put option.

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?

Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

If you have bought a right to buy foreign currency, you are:

If you expect the British pound to appreciate, you could speculate by pound call options or pound put options.

If a currency call option is in the money, then the present exchange rate exceeds the strike price.

The purchase of a currency put option would be appropriate for which of the following?

American-style options can be exercised any time up to maturity.

The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal Trade Commission.

If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.

The spot rate of the euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro?

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

It is possible to have an opportunity loss when using futures to hedge.

A currency call option grants the right to sell a specific currency at a designated price within a specific time period.

Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts.

When the current exchange rate is less than the strike price, a call option with that strike price will be in the money and a put option with that strike price will be out of the money.

Exam 5: Currency Derivatives

A high spot price relative to the strike price will result in a relatively high premium for a call option and a relatively high premium for a put option.

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?

Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

If you have bought a right to buy foreign currency, you are:

If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options.

If a currency call option is in the money, then the present exchange rate exceeds the strike price.

The purchase of a currency put option would be appropriate for which of the following?​

American-style options can be exercised any time up to maturity.

The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal Trade Commission.

If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.

The spot rate of the euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro?

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

It is possible to have an opportunity loss when using futures to hedge.

A currency call option grants the right to sell a specific currency at a designated price within a specific time period.

Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts.

When the current exchange rate is less than the strike price, a call option with that strike price will be in the money and a put option with that strike price will be out of the money.

If you expect the British pound to appreciate, you could speculate by pound call options or pound put options.

The purchase of a currency put option would be appropriate for which of the following?